At year-end 2013, Wallace Landscaping’s total assets were $1.6 million and its a
ID: 2726186 • Letter: A
Question
At year-end 2013, Wallace Landscaping’s total assets were $1.6 million and its accounts payable were $395,000. Sales, which in 2013 were $2.5 million, are expected to increase by 25% in 2014. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $415,000 in 2013, and retained earnings were $245,000. Wallace has arranged to sell $80,000 of new common stock in 2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2014. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 3%, and 55% of earnings will be paid out as dividends.
A. What was Wallace's total long-term debt in 2013? Round your answer to the nearest dollar.
What were Wallace's total liabilities in 2013? Round your answer to the nearest dollar.
B. How much new long-term debt financing will be needed in 2014? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar.
Explanation / Answer
A.
Total assets = $1.6 million = $1,600,000
Stockholder’s equity = Common stock + retained earnings =$415,000 + $245,000 = $660,000
Total liabilities in 2013 = Total assets – Stockholder’s equity = $1,600,000 - $660,000 = $940,000
Long term debt in 2013 = Total liabilities – Current liabilities = $940,000 - $395,000 = $545,000
B.
Change in total assets = 25% * $1,600,000 = $400,000
Change in current liabilities = 25% * $395,000 = $98,750
Retained earnings in 2014 = Sales in 2014 * Profit margin ratio * Retention ratio
Retention ratio = 1 – Dividend payout ratio = 1 – 0.55 = 0.45
Retained earnings in 2014 = ($2,500,000 * 1.25) * 3% * 0.45 = $33,750
AFN = Change in total assets – Change in current liabilities – Retained earnings = $400,000 - $98,750 - $33,750 = $267,500
New common stock to be issued = $80,000
New long term debt to be issued = AFN – New common stock = $267,500 - $80,000 = $187,500
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